IPOs: China Rapid Finance, Lakala Join Race for Financial Listings

Bottom line: This year is likely to see at
least a half dozen privately owned financial services companies
make public listings in the U.S., Hong Kong and China, with Lakala
and Lufax likely to be among the first.

Lakala files for ChiNext IPO

We're already three months into the new year, and still awaiting
the first of what looks set to be a bumper crop of IPOs by a new
generation of privately owned financial services firms that are far
more dynamic than their state-run peers. Two more of those are in
the headlines today, led by China Rapid Finance, a
peer-to-peer (P2P) lender that says it's eyeing a $100 million IPO
in New York. At the same time, the
popular Lakala electronic payments service has
filed to make a listing on the Nasdaq-style ChiNext board in
Shenzhen.

That pair are joining a few other notable names that are reportedly
aiming to list in the not-too-distant future. That group
includes Lufax, which bills itself as China's
largest P2P lender and is aiming to list in Hong Kong. Then
there's Qudian, a microlender that is looking to
raise hundreds of millions of dollars with a New York listing. And
of course, the granddaddy of them all is Ant
Financial, which could raise more than $1 billion with a
listing in Hong Kong or dual listing in Hong Kong and China.

So what's happening here, and why this sudden explosion in private
financial services firms? The answer is relatively straightforward.
In short, China didn't really allow such companies until about a
decade ago, when a few bold ones like Alibaba (NYSE: BABA) quietly began offering
electronic payment services without ever being formally allowed to
do so.

The trend has rapidly gained momentum in the last 3-4 years, as
Beijing more formally embraces this newer generation of companies
that specialize in lending to private consumers and small
businesses. That's a critical element, since China's traditional
state-owned banks are notoriously bad at lending to the private
sector, since they usually require real estate collateral that most
such borrowers don't have.

All that said, let's look at the latest two entrants from this new
generation of companies to join the financial services IPO queue,
starting with China Rapid Finance. The firm, which was valued at $1
billion at the time of its latest fund-raising in November, is
looking to raise at least $100 million in its New York listing,
according to one report, which cites unnamed sources.
(English article)

There's not much else about the actual status of the IPO, but the
report does contain some financials, which say the company has
serviced 1 million borrowers and handled 8.8 million loans as of
last October. The report says China Rapid Finance was actually
founded in 2001, which means it obviously began its life as
something else and has probably only discovered P2P lending in the
last two or three years.

Lakala Likes ChiNext

Next there's Lakala, which is emerging as one of the few
private-sector rivals to juggernauts Alipay, Ant
Financial's biggest asset, and Tencent's (HKEx: 700) payment system linked
to its WeChat instant messaging service. The company has
formally filed for a ChiNext IPO, saying it will issue at least 40
million shares that amount to about 10 percent of its total share
count. (English article)

There's no given target for the fund-raising, but we can probably
assume that Lakala is worth around $1 billion, which would put the
fund-raising target at $100 million or more -- a relatively high
amount for a ChiNext company. Lakala is actually earning a profit
at the moment, posting a 212 million yuan ($31 million) profit on
revenue of nearly 2 billion yuan in the first nine months of last
year. Those numbers certainly aren't too bad for such a young
company, and I expect the IPO should be well received.

We'll close with a final look at who might be first to market, and
what kinds of valuations they might get and risks they may face. It
does appear that Lakala might be first, since it's the only one to
actually make a firm filing so far. Next up should be Qudian, China
Rapid Finance or Lufax, as this trio race to become China's first
publicly listed P2P lender. I would probably put my money on Lufax,
as it seems the most advanced in the process and has big named
backers like Ping An Insurance (HKEx: 2318;
Shanghai: 601318) helping out. That could be followed by Qudian,
and then China Rapid Finance, with Ant stepping up around the end
of the year.

At the end of the day, all these offerings should be relatively
well received, since China stock buyers currently have very few
choices for financial services plays outside the state-run realm.
The biggest uncertainty all will face is China's regulatory
environment, which is almost certain to restrict their activities
and force them to create reserve pools to lower risk. But companies
that have made it this far are likely to survive over the longer
term, meaning all could be good investments over at least the next
5 years.